Blue Switch 1 is a separate switch circuit, and should have no bearing on the light for the stairs… which was fed from the single gang box upstairs. It shouldn’t matter at all if it is on or off.
It sounds like there is a Aux detection issue that got introduced with the newer firmwares on some models. 3.07 adds the ability to set the levels, but it is in beta I believe, you’d have to request to get it.
As far as “stacking” bypasses, your illustration is correct… You’d only want bypasses in one of the lights on the circuit, likely the upstairs one, even if you need to “stack” them. You don’t want them on both lights.